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May 20, 2014

Clients Moving to the City? Communal Living Comes With Complex Risks

There often comes a time when the desire to live in a big city takes hold. Perhaps the children have grown up and flown the coop, suddenly making the large house in the suburbs feel a bit empty. Or maybe one wants a second home closer to where they work, or simply seeks easier access to attractions like museums, theaters and nightlife, not to mention local grocery stores and restaurants.

There are all sorts of reasons why people want to live in an urban environment like a brownstone, condominium or co-op loft in a former warehouse. But living in the city invites more complex risk exposures than homes outside the city present.

Joint community living in a condominium or co-op loft, for instance, poses significant perils, according to Peter Beeson, co-founder and president of Fit Insurance, Inc., a Bellevue, Wash.-based insurance agency.

Peter said the financial pitfalls that can arise from the special assessments levied by these buildings’ homeowners associations (HOAs) for property and liability losses are often larger than the HOA’s reserve fund. Even if the reserve fund is sufficiently capitalized, the association might have to charge a special assessment in an emergency situation, particularly if the HOA does not have adequate insurance covering common areas.

“When you live in a condo or co-op, you are no longer the captain of your own ship,” Peter explained. “You are now the member of a community, and are financially jeopardized by others’ actions or inactions. There are far more bad things that can happen to you than when you were an independent homeowner.”

Particular Perils

Imagine you live on an upper floor of a high-rise condo and a neighbor or friend with a small child comes over to visit. The toddler surreptitiously stuffs a toy into the toilet that backs up and floods the floors below. While such damage can be significant in a house, the cost pales when compared to the damage in a condominium housing other affluent individuals with expensive furnishings and fine art and beautifully designed apartment interiors. “The liabilities are huge—well into the millions and millions of dollars, and it’s your responsibility,” Peter said.

He provided another example (an actual claim filed by a client) that involved an exchange student from a foreign country who spent time with a wealthy family at their Seattle condo. “The young fellow thought the sprinkler head hanging in the closet was a hook, and when he hung his coat from it, the sprinkler automatically triggered in the entire complex, resulting in a huge claim that exceeded the reserve fund,” Peter noted.

There is also the risk of claims involving condo owners who neglect to close a building’s garage doors upon leaving the facility, exposing fellow homeowners to the theft of expensive automobiles and break-ins. Similar risks are presented by owners that lose their elevator and/or garage key fobs.

Warehouse lofts that have communal entertaining spaces on roofs also present unique risks. “If a loft owner is on the roof barbecuing some steaks and forgets to properly shut off the permanently-plumbed natural gas because they weren’t used to doing this in their suburban home, they may inadvertently torch the entire building,” Peter said.

Peter looks at it this way: The greater density of high-wealth people communing in a small environment, the more severe the risk of potential losses. “By concentrating the risk rather than spreading it, you don’t suffer small damages, you suffer big ones.”

Shared Pursuits

One of an HOA’s primary responsibilities is to ensure that each owner equitably shares in the financial burdens of all owners—hence the creation of the reserve fund. When the lobby needs to be painted, for instance, the cost is pulled out of the fund. Ditto if someone trips over a can of paint in the lobby and is injured, or a pipe in a communal area fractures and results in a flood that damages two of the building’s fifty units.

The problem arises when these expenses are larger than the funded reserve. In such cases, each condo owner is hit with an assessment based on their equity share in the building. “Most just figure the assessment is covered by their insurance,” Peter said. “This is not always the case, and it is not uncommon for the limits of liability to be less than the damage amount.”

You might now be thinking that a brownstone is a better choice than a high-rise condo or warehouse loft, but this type of dwelling also presents risks that are different than a more traditional suburban home. Brownstones and townhouses attached to each other are at greater risk of structural, fire and water damages.

At Chubb, we’ve seen claims of homeowners who said their homes sustained cracks in the shared walls because of construction activity next door, as well as claims for expensive paintings that fell from their moorings and valuable objects that literally vibrated off of shelves. Exterior construction creates another hazard as it may entail the use of scaffolding, which can increase the risk of someone burglarizing the home by climbing the scaffold to gain entry in a third-floor window.

No one is arguing against the myriad amenities and other pleasures of city living. Certainly, these joys and simplicities outweigh the risks, which can be managed and, in many cases, transferred to an insurance company. Nevertheless, while the city may be a simpler place to live, the financial risks are more complex.

The solution is pretty simple. Anyone considering a move to the city should engage the services of a specialized insurance agent like Peter, someone cognizant of the varied and unique threats posed by an urban environment, and the appropriate insurance coverages and limits that address these varied perils. As Peter noted, “Too many smart people fail to understand the complexity of the world they just stepped into.”

He’s right, of course. There is no reason to ruin this exciting part of your life with what may turn out to be your worst experience. The solution is to reach out to people like Peter who know the risk landscape. An agent specializing in high-end city abodes can “walk” the home to discern potential exposures, review a condo or co-op building’s rules, regulations and insurance policy to discern who pays for what in the event of a loss, and provide recommendations on the types of insurance coverages and limits of protection needed to transfer personal financial loss.

For quality of life, many cities can’t be beat, which is why dwellings cost so much. For newcomers, understanding the homeowner risks before plunging ahead is a wise investment.